Good day and welcome to Cresco Labs' Second Quarter 2019 Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jake Graves, Investor Relations for Cresco Labs. Please go ahead.

Good afternoon, and welcome to Cresco Labs' Second Quarter 2019 Earnings Conference Call. We look forward to speaking with you today and discussing the great progress we have made as a company. I am joined on the call today by our Chief Executive Officer and Co-Founder, Charlie Bachtell; our President and Co-Founder, Joe Caltabiano; and our Chief Financial Officer, Ken Amann. Prior to this call, we issued our second quarter 2019 earnings press release for the 3 and 6 months ended June 30, 2019. This document has been filed with SEDAR and is available on our Investor Relations website at investors.crescolabs.com.

Before we begin our remarks, I'd like to remind everyone that certain statements made on today's call may contain forward-looking information within the meaning of applicable Canadian Securities Legislation as well as within the meaning of the safe harbor provisions of United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include estimates, projections, goals, forecasts or assumptions, which are based on current expectations and are not representative of historical facts or information. Such forward-looking statements represent the company's beliefs regarding future events, plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such forward-looking statements, including economic conditions and changes in applicable regulations. Additional information about the material factors and assumptions forming the basis of our forward-looking statements and risk factors can be found under Risk Factors in Cresco's 2018 annual information form filed with SEDAR on May 9, 2019, and available at w ww.sedar.com. Cresco does not undertake any duty to publicly announce the result of any revisions to any of its forward-looking statements or to update or supplement any information provided on today's call. In addition, during today's conference call, Cresco will refer to some pro forma and non-IFRS financial measures, such as pro forma revenue, adjusted EBITDA and operational gross profit, which do not have any standardized meaning prescribed by IFRS. We believe these non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings press release for the calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with IFRS. These pro forma and non-IFRS financial measures should not be considered superior to, as a substitute for, or as an alternative to and should only be considered in conjunction with the IFRS financial measures presented in our financial statements. Please also note that all financial information on today's call is presented in U.S. dollars, unless otherwise noted. And with that, I'll now turn the call over to our CEO, Charlie Bachtell. Charlie, please go ahead.

Good afternoon, everybody, and thank you for joining us on today's call. With these quarterly calls, we understand the primary purpose is to provide the public with our quarterly financial and business updates, but we also see these as an invaluable additional opportunity for us to provide the public, investors and analysts more insight on who we are as an organization, how we think about the industry as a whole and how we impact it. But in true Cresco Labs fashion, we'll execute on this additional opportunity compliantly, professionally and efficiently. We understand that it is a privilege to be a publicly traded cannabis company and delivering on what we promise is a fundamental value of ours. We've made a commitment to the market to responsibly accelerate top line growth to achieve a superior capital agenda that includes thoughtful and accretive M&A transactions and a focus on creating efficiencies as we scale this business. With that, in Q2, we delivered on what we said we would deliver. Focusing on responsible top line growth, our team generated approximately $29.9 million in revenue, which represents a 253% year-over-year growth and a 42% growth on a sequential basis. Factoring in pro forma revenue, we generated $52.7 million on the top line, which represents a growth of over 55%, sequentially, with the same asset portfolio. We expanded operating gross margin to 48.1% in Q2, up 3.5% from the previous quarter. And we had $14.5 million in adjusted EBITDA or $2.3 million excluding the net benefit of biological assets. The increase in gross margin and EBITDA clearly demonstrates the leverage and efficiencies available to us as we continue to go deeper in each of our 11 markets. The acceleration of top line growth will continue as we develop further operating scale in our strategic 11-state footprint. As for our capital agenda, Cresco Labs has strategically allocated capital through accretive transactions to gain exposure to 70% of the addressable U.S. population. This strategic geographic footprint provides us the ability to focus our efforts, execute and create scale in the highest-value markets that include the vast majority of the U.S. population. As adult use continues to expand across the U.S., and as we continue to grow the presence of our in-house brands, we expect to touch even more consumers. With most of our revenue still coming from 2 markets, fortunately 2 of the best and fastest-growing markets in the country, in Illinois and Pennsylvania. We still have substantial growth ahead both within those 2 states and as we dive deeper into the other 9 states over the next several quarters. We have continued to invest in our brands to gain material market positions where we operate, partnering with some of the best agencies in America to build creative work that will drive the industry forward and again establish our brands as the strongest brands in the largest states in the country. On August 8, we announced regulatory approval for the acquisition of Valley Agriceuticals, 1 of only 10 vertically integrated licenses in the state of New York. Between Valley Agriceuticals in New York and Origin House in California, Cresco's not only gained exposure to 2 of the most populous states in the U.S. but established cornerstone positions in 2 of the world's most influential consumer markets. A meaningful presence in these 2 markets is core to the achievement of our objectives to establish the strongest national brands in the cannabis industry, driving lasting value for shareholders. California is shaping up to be the market we all knew it could be as enforcement measures have started to take toll on the illegal market. 2020 is going to be a big year for the state, which is already the largest-regulated market in the world. California is also a perfect launchpad for a national house of brands as it is the closest environment we have today to traditional CPG market. We plan to leverage learnings from this market to further develop our premium in-house brands and to launch new ones. California will be a big part of the Cresco story in coming years. We are now present in every state that we need to be in. So as we look towards near-term M&A, it is no longer about expanding the number of states that we're in. It's about going deeper, gaining meaningful material and market-leading positions in these states and adding brands, IP and other assets that will increase margins and provide defensible moats on returns for shareholders. The rubber is meeting the road here for Cresco, and we are right on track to generate substantial revenue and earnings as we attack these opportunities. From a long-term perspective, we focused our efforts on becoming dominant in the middle 2 verticals of the value chain, the creation of the consumer-branded products and the distribution of those brands in the third-party dispensary shelves. It is our strong belief that based on the proven models of other global CPG companies, that this is where the sustainable competitive advantage and the bulk of the margins in the industry will reside. That said, we are in a transitionary period where vertical integration is an important part of achieving that long-term objective. We view our dispensary network, like several of the world's largest consumer brands, as an ideal way to directly [reach] the consumer in an experiential way, educating them, creating comfort, broadening the base and driving brand equity for our in-house suite of products that they will then also find in other stores as they travel throughout California to New York to Illinois to Florida, et cetera.

Earlier this month, we launched our new retail brand, Sunnyside. We plan on rolling this concept out across our geographic footprint with a focus on wellness, education and customer service. This is not just a pretty store front or an attempt to mimic the aesthetic of the Apple Store. This is a brand-new and truly customer-focused approach to the dispensary model designed by our team of proven experts in branding, consumer experience and retail marketing. Our model is based on addressing the largest market segment, wellness and general quality of life enhancement, which accounts for 80% to 90% of most markets around the country. We expect Sunnyside to advance the conversation around wellness [in] cannabis and to quickly become a world-class retail brand that appeals to the new wave of consumers reshaping cannabis culture.

Ultimately, our ability to execute comes down to the strength of our people. A point of distinction for Cresco Labs has always been the strength of our management team. I'll challenge anyone to find a team in the cannabis space with a better track record of scaling global champions, and we've continued to make it stronger. In mid-July, Angie Demchenko joined our senior leadership team as Cresco's first Chief People Officer. Angie has a proven track record of building best-in-class HR strategies and operations as the former Head of HR for Starwood Retail, the commercial real estate arm of Starwood Capital; and SVP of HR at Jones Lang LaSalle. She is one of the best executive coaches and leaders we've had the pleasure of working with, and I know Angie will ensure that we maintain our strong workplace culture as well as the focus on our core values and mission as we scale.

In early July, we also added Mo Dastagir to the team as Chief Information Officer.

This is a critically important role given the company's rapidly expanding footprint and the imperative to drive value from our rapidly expanding data assets. Mo will be responsible for overseeing the technology infrastructure throughout Cresco and designing, scaling and implementing technological systems and platforms to optimize the customer experience. Mo comes with a proven track record of driving and managing technological change at an executive level, previously holding senior leadership positions focused on expansion and integration at Amazon, Novartis and as VP and CTO of Sears Home Services. We're very pleased to welcome Mo and his leadership to the team.

I'd also like to say a few words about closing of our transaction with Origin House. While we certainly would've been happy to close the acquisition in June. We also see this HSR second request as a transformative opportunity for cannabis. The fact that a federal agency is reviewing the M&A transaction in this industry must be seen as validation. They're acknowledging the existence of this industry and running our transaction through the same process as traditional industries. It is also a chance to work directly with the Department of Justice as they begin to learn and understand this space. A federal agency that will likely be utilized as a resource as legislators and other federal agencies continue to evaluate the SAFE Act and the STATES Act. It's in our DNA to embrace regulation and compliance and act as a resource and partner with our regulators. We've shown this time and again with state regulators and legislators and it clearly now includes agencies within the federal government.

In summary, I know I speak on behalf of the entire team when I say that I'm very excited about the future for Cresco. It's taken us 6 years to get here, and we're just getting started on our journey together, with 2020 shaping up to be an inflection point for the company. Quarter after quarter, we demonstrate our ability to execute on our strategic plan and key milestones. The evidence is in the numbers and the reputation that we've earned with our employees, our regulators, our customers and the investor community. We consistently have demonstrated unique understanding of where this industry is going, providing the thought leadership to get it there, the ability to execute and make that happen and then an ability to get the disproportionate share of the resulting opportunities. Our performance is driven by our first-class team that will continue to be the foundation of our long-term success. Now I'd like to pass the call to Joe Caltabiano, Co-Founder and President, to cover some additional recent updates and highlights

Thanks, Charlie. We've been clear that our approach is to build a strategic footprint in high-population, culturally significant states and then to go deep to build the most important cannabis company in the U.S. In the interest of time, I'll hit on some quick highlights. A deeper update of our 11 markets will be included in our MD&A, and I'm happy to address any questions on individual states at the end of the call.

In our home state, Illinois, we generated 30% sequential organic growth, driven by rapid expansion in average patient count of over 5,200 per month in Q2. In addition, over the past 2 weeks, the state expanded the medical market to include conditions such as chronic pain and migraines. We expect this addition will drive significant growth in patient count for Cresco over the remainder of 2019. Illinois is about to get even more exciting. In late May, the state passed legislation to open up cannabis to adult use beginning in January of 2020. This is massive for Cresco. We already have the largest market share in the state, and the Illinois cannabis market is projected to be between $2 billion and $4 billion at maturity. Illinois has put forth a model that will make it one of the most intelligently regulated states and hopefully, provide a blueprint for states transitioning over the next few years. It was the first large state to legalize cannabis through the legislative process instead of through voter referendum, and a large part of why the government was able to achieve it was their focus on social equity.

In California, which is one of our newest operating markets, we have driven rapid sequential growth for the sales of Cresco products to third-party dispensaries. This is a testament to the strength of our brand in not only the largest cannabis market in the world but also the most competitive. It also a demonstration of Cresco's unmatched ability to get on the ground and operationalize rapidly as well as the strength of our sales team to assemble. We have been working closely with the Origin House team and introduced Cresco-branded products into the Continuum distribution platform starting in June. Continuum currently touches the vast majority of dispensaries in the state, and we expect it to drive rapid adoption of our house brands.

In Florida, VidaCann is progressing on their expansion plans. They opened dispensaries in Jacksonville and Pensacola in mid-June, bringing the total open locations to 12 with plans to open in Miami and Orlando in the very near term. VidaCann has plans to have about 20 stores opened by the end of 2019. They're also in the final stages of an additional 105,000 square feet of cultivation space in Jacksonville, Florida.

Our teams continue to work towards integration and expect to be in the position to move quickly when the transaction closes. We've also seen some fantastic leadership and ability to execute from the incumbent team, and we're excited to see them make Cresco Labs a better company across all our platforms.

New York and Massachusetts are both exciting markets that will be hugely important for our strategy. It was no small feat to receive regulatory approval to close on 1 of only 10 available vertical licenses in the state of New York. This success is a direct result of our team's operating track record as well as our established reputation for being good stewards in the industry at all levels, regulatory, economic, social and community. Valley Ag has 4 licensed dispensaries, with operating locations in Bardonia and New Hartford and new dispensaries scheduled to open in Huntington and the Williamsburg neighborhood of Brooklyn by the end of this month.

In Massachusetts, we continue to progress on the Hope Heal Health transaction and expect the Cannabis Control Commission to approve our transaction by the end of the third quarter.

In Michigan, we still expect to generate revenue in the state starting at the end of Q3 with our full cultivation facility in Marshall scheduled to be completed early in 2020.

On the branding and product side of the business, we expect Well Beings products to be available online in every state where regulations permit by mid-September. These are top-notch CBD products in and of themselves, but this launch also comes with the added benefit of raising brand awareness for all the Cresco in-house products, particularly in states where there are no medical or adult-use cannabis programs.

Turning to Sunnyside. This is a massive opportunity for Cresco, not only in terms of near-term revenue and response, but in terms of long-term product development efforts, brand awareness and scaling.

At Cresco, it all starts with the customer. Sunnyside was designed to provide the highest level of customer experience and to normalize (inaudible) experience for customers at the point of sale. The ancillary benefit will be the generation and capture of consumer data and insights on developing customer trends. Mo, our new CIO, will be overseeing the efforts of our customer data team to drive actionable intel. We expect to open the first Sunnyside location in Philadelphia in November with future locations planned for Florida, Illinois, Ohio, Arizona, Massachusetts and Michigan. We will be launching home delivery in the Arizona market over the next 2 weeks. This puts us within direct reach of the 4.5 million people in greater Phoenix area, the fifth most populated city in the U.S. Omnichannel is an integral part of our strategy and retail plan nationally. We will use Arizona as a model to launch in other markets, and we are excited to report back on the rollout. Cresco-branded THC products are now on shelves in 7 of the 11 markets we operate in. We plan to have Cresco products available to customers in all 11 markets by the end of 2019. In our current stronghold markets of Illinois and Pennsylvania, we are in 100% of the dispensaries in the state, which is ultimately the goal for each and every one of our markets. With that, I'd like to turn the call over to Ken Amann, our CFO, to speak about quarterly financials.

Thank you, Joe, and good afternoon, everyone. I'll begin by reviewing the financial highlights for the quarter and then address our current liquidity position and capital markets activity. Please note that all numbers are stated in U.S. dollars. The second quarter provided evidence that our approach to the market is generating the result that we planned. We entered the most strategic cannabis markets in the U.S., quickly built vertically integrated operations to get our products on third-party shelves, driving substantial revenue growth. As expected, our revenue is ramping strongly, gross margin is expanding as we drive operational efficiencies to reduce cultivation costs, and we have invested to build a platform that once scaled, can create substantial earnings. We generated $29.9 million in revenue in Q2 for sequential growth rate of approximately 42% with contribution from 6 of our markets. Adding pro forma revenue, that number increases to $52.7 million for a growth rate of 55% over Q1 pro forma. Pro forma revenue includes pending acquisitions in New York, Massachusetts, Florida as well as (inaudible) and our investment in Nevada. On a sequential basis, we generated strong revenue growth in all key markets, which is just the beginning as we go deeper and get to scale. The second quarter revenue mix was approximately 62% wholesale and 38% retail, a shift from 55% wholesale and 45% retail last quarter, which was mainly driven from the increase in wholesale revenue in California. Because we are focused primarily on the middle 2 verticals of the value chain, third-party retail shelves are key. By rapidly expanding our wholesale exposure, we [can effectively] scale into new markets without the same fixed cost investment that comes with owning a retail network. Ultimately, this strategy also creates far more exposure for our in-house brands, which goes directly to our objective to create a national house of brands.

Overall, our operational gross profit margin was 48.1% in the quarter, which excludes any impacts of biological assets. This represents an increase of 3.5 percentage points compared to Q1. This was largely the result of our focused efforts to drive automation and operating efficiencies with improved cost per gram as well as improved packaging and processing costs quarter-over-quarter. This is proof that going deep in states to drive economies of scales is a winning proposition. In Pennsylvania and Illinois, our 2 largest and most mature markets, we have improved our gross profit margins by 4.9 and 9.1 percentage points, respectively, over Q1. In California, which is relatively a new market for us, we made [targeted] investments in gross margin during the quarter to drive momentum and awareness for Cresco-branded products. Our Investments have already started to pay off with a significant revenue increase during the quarter compared to Q1. We have laid the foundation, and as awareness grows, particularly as we begin really pushing product through Origin House's Continuum platform, we expect to leverage volume into expanding gross margins. Origin House's core distribution business continues to perform well. Earlier this month, they reported preliminary unaudited revenue of approximately $16 million for the second quarter, an increase of about 90% from Q1. We expect to be able to leverage this platform quickly upon closing. And as Joe mentioned, we are currently working closely with the Origin House team on integration planning so that we can get off to a running start when the transaction closes.

We've generated solid profitability in the quarter as measured by adjusted EBITDA of $14.5 million in Q2. Excluding the net benefit of biological assets at $12.2 million, adjusted EBITDA was $2.3 million. Q2 provides a window into how we see our operating and financial models coming together to drive results for shareholders as we scale over the coming years.

SG&A, excluding nonrecurring items and equity compensation, was $13.5 million in the second quarter compared to $11.4 million in Q1. The increase reflects the increased headcount as we continue to build out our infrastructure to make investments aimed at driving brand awareness to gain material market positions. It is important to note that while SG&A is elevated as a percent of revenue versus what we would expect on a normalized basis, this ratio will continue to trend lower as we generate higher sales and leverage our existing infrastructure. The investments we have made in people and G&A to this point can support a much larger business across the states that we're currently operating in.

Our cash utilization was elevated during the quarter as we invested about $16.3 million in PP&E to build out production space in key markets, such as Illinois, California, Pennsylvania and the expansion into Michigan.

We also loaned $3.4 million to fund build-out costs for pending acquisitions and paid nearly $15 million for the legal close of acquisitions, primarily related to MedMar and PDI.

At the end of the quarter, we had $61.1 million in cash. As a senior team, we have been focused on growing Cresco Labs in such a way that maximizes returns for the company's shareholders. A strategic approach to capital structure is absolutely core to the achievement of our objective to become the most important cannabis company in the U.S.

In conclusion, I'll just reiterate that we, as a senior team, are very pleased with the results this quarter. Our people are executing well, and the evidence is showing up where it matters: in the numbers. We are right on plan, and with the vast majority of our revenue still coming from Illinois and Pennsylvania, we have substantial room for growth over the remainder of the year and through 2020. Thank you for your time today, and I'll now ask the operator to open up the line for questions.

Can you just touch on the mechanics for Origin House? I know you're saying you expect it to close in 4Q. I think it's -- a lot of maybe 80-or-so questions to get back to the DOJ. It sounds like that's on track for the next few weeks, and then it's, what, a 30-day period after that? Can you just lay out some of those steps?

Sure. Yes. Michael, this is Charlie, and thanks for calling in. Good question. So the way that, that process works, as you explained, there is a list of some incredibly thorough questions that they ask related to the way that the business operates. And compiling the substantially complete answers to that is not an insignificant task. We have devoted tremendous amount of resources to pushing that forward. And the time line that you referenced is in line with our expectations. We do, as I mentioned during the call, we look at this as a unique opportunity, not only of course to get the Origin House transaction approved, but to have an audience with the DOJ. With all of the potential for federal change on the horizon, we think it's an incredible opportunity to play a role as a resource and help a federal agency really better understand the space, and of course, a professional, highly regulated, compliance-focused manner in which the space is progressing. It's a critical opportunity that we're actually excited to have the opportunity to be a part of it.

Sure. This is Joe. Our expectation. Currently, we have 26 open retail stores. We expect to grow that to 35 to 45 by the end of the year, with 15 to 25 of those being branded as Sunnyside, the new retail brand that we've launched, the wellness brand. So yes, we expect to end the year around 35 to 45 open retail stores.

So currently, we sit with 61 retail licenses under our umbrella. So we certainly expect to continue into Q1 at a very rapid expansion pace. Then as we continue to explore M&A opportunities, it will further our growth. But yes, we expect to have 61 stores open and functioning by end of Q1, early Q2.

No. That's great. Just last one from me. On the CBD rollout. Can you give us a sense of what size retail footprint you might get those in -- those products in? How many retail outlets should we expect that to be in? And how quickly would that build? It sounds like it -- does it all come at once in mid-September? Or how should we think about how that progresses?

Yes. So -- this is Charlie. So the rollout of the Well Beings, the hemp-derived CBD product line, is first going to be DTC, direct to consumer. That's going to be the initial launch, with retail to follow thereafter. Now some of the other house of brands that are also going to transition in the hemp-derived CBD versions like, Remedi in, I think, late September -- mid- to late September. You will see those start to launch in more of a traditional retail platform. As far as the ramp-up though I think you'll see us continue to focus on DTC as a primary channel for the foreseeable future and retail playing the second initiative. We really like this opportunity, again, as we've talked about before the way that we think about CBD is potentially a snapshot of the future of cannabis where direct to consumer comes into play and is less reliant on brick-and-mortar. And we really want to -- we want to explore that. So we're ramping up with a direct-to-consumer model as the start.

Congrats on a really strong quarter here. Just following up on the Well Beings, and appreciate the commentary around starting with the DTC channel. But is the plan to eventually get these products in terms of brick-and-mortar into both the dispensary channel as well as the national foods and mass market retailers? And are you currently in discussions with any larger-scale retailers for the product?

Yes. Derek, this is Charlie. So yes, I think we're about to launch a pretty cool approach to this space. It's going to -- from a utilization again of digital advertising platforms is going to be the focus. We will incorporate the portfolio -- the product portfolio into the dispensary channels as well, where allowed. We think that's a, again, a nice synergy, especially with our current distribution platform to take advantage of that. But primary focus being on more mainstream opportunities to communicate and resonate with the customer base that aren't available to us in the traditional THC channel.

Yes. You're going to see both. And I think that will continue to expand in the house of brands. You'll eventually, again based on form and regulatory guidance, you'll see Mindy's crossover and a hemp-derived CBD option as well as potentially the Cresco brand itself.

Yes. So there, too, I think we are anticipating Q3 closings or approvals. I should say that's still subject to regulatory approval. We've seen the regulatory approval process take a little bit longer this year than maybe historically because they -- again the focus on this space, right, the diligence that regulators are putting into reviewing the industry and transactions that are taking place within it, has increased, but the good thing is as we showed with New York, while we did not anticipate that to be an 11-month review process, we got it across the finish line. And I think it again speaks to the strength of Cresco. I can assure you lesser companies would not have been able to get that approval in place. It was a lot of work, it was a lot of communications, a lot of efforts went into it and a lot of that was predicated on Cresco being Cresco as a result of why that was approved. So I -- we're confident in the ability to get these across the finish line. Still an expected time line of Q3 for VidaCann.

Okay. Joe, maybe for you. Just in terms of the patient count in Illinois, can you just give us an update in terms of numbers, what you're seeing for patient count? Have you seen an acceleration as the states become a little bit more liberal in terms of what cannabis is being allowed to [Remedi]? And then as well I think it was last quarter you commented it was the 12th consecutive quarterly increase in market share in Illinois, it -- was it the 13th this quarter?

So what we're seeing in Illinois is last month we added about 5,200 new patients. We've got -- we've crossed the 80,000 patient mark. Now with chronic pain being one of the conditions that has been added as well, migraines. We are expecting that to ramp up potentially into that range that you see in other markets with chronic pain, like Pennsylvania we are adding 10,000 patients a month. So we do expect chronic pain and migraines to drive a significant amount of new patients. In very real time, our activation group is out there, are putting events together to really start to drive patient awareness to the medical program. And then the second piece, our quarterly growth wholesale penetration remains flat this quarter.

Okay. And then I guess, the last one just in terms of Florida, and I think I asked something along these lines in the last call, but I know you've had a few more months with flower being allowed for sale in Florida. Can you just comment in terms of the split that you're seeing between flower and concentrate sales in that state?

Yes. So you're seeing there -- you're continuing to see -- again, this is Charlie. You are continuing to see flower demand increase in that state, I think, similar to trying to think of the other programs that have had that sort of trends -- the transition, Pennsylvania being the one closest to us, started as a state program without flower. And as soon as flower enters that marketplace, it does tend to increase significantly and then normalize where it does in most other markets, which is somewhere between that 45% to 55% of the overall market is that flower space. So I think you're starting to see similar trends develop in Florida and expect the normalization rate in that same range as well.

Congrats on the great quarter. Just had a question I guess in relation to Massachusetts. I know -- Joe mentioned closing by end of Q3. Just wondering how you guys are progressing with your rec license application there and whether you think that on closing or very near about then we could see you guys get into direct channel and mass?

So we have had our inspection. This is Joe. We have had our recreational inspection and passed. So we are slated to be on one of the upcoming final agenda meetings for the state. The CCC has moved to kind of a monthly meetings calendar now. So waiting to get on to that, which should be in the September meeting. We should see the rec license come at that meeting as well. So the expectation is again to have recreational approved this quarter as well as the transaction approved this quarter.

Great. That sounds good. Joe, I appreciate the kind of color you gave on the sequential growth in Illinois. So I was wondering given the progress, solid progress in California, if you might be able to add some color around your sequential growth there? And maybe just comment on the ability to leverage the Continuum platform thus far and how that may perhaps accelerate upon closing?

So the Continuum platform has certainly been an incredible opportunity for us to penetrate that market. We did see some substantial gains in California this month for Cresco. It was having access to all of the doors that Continuum has worked very hard to open over the years. We now have focused on brand activation, PAD events and really trying to drive that brand into more and more stores with the goal to be in 75% of the stores with the Cresco brands by the end of the year. We think that's a very realistic opportunity with a sophisticated platform like Continuum. Once that transaction closes with us, and Continuum, we think, further leverage the capabilities of Cresco and Origin House to improve on a best-in-class service will be exciting for both parts. But we're seeing steady growth in California, and we'll continue to have some significant opportunities and activation events that are really driving the brand awareness out there.

Okay. Good. More here is on Illinois and in the sense that, clearly, the new medical qualifying conditions will boost growth nearly immediately. But how are you guys preparing for that? And the opening of the rec market in the sense that you had already expanded capacity or planned to expand capacity, is there any additional expansion you're considering given what's going on there? And are you certain or is it pretty well assured that rec start -- sales will start at the beginning of next year?

It's Joe again. It's funny. We had hoped for an expansion in this medical program for a long time and now it got overshadowed by having recreational come in. Chronic pain is certainly a needle mover as it relates to any cannabis market that you've seen. We're excited in ramping up on all aspects of the business. We have our construction team overseeing our expansion in Lincoln and Kankakee. The real estate team is evaluating multitude of opportunities as it relates to new Sunnyside dispensaries. We're ramping up staff, manufacturing capacity. We currently have the maximum number of cultivation facilities at 3, and we currently will have -- we will have 10 open retail licenses in the state as well.

So on all fronts, we're expanding both headcount, operational capacity, manufacturing capacity. And the launch in the recreational -- if you look to the first iPhones being sold, it's going to be a monumental event in Illinois. You're going to see an incredible demand uptick. We're doing everything within our power to be prepared for it. I think we will be the best-suited operator to be ready for that launch and make sure patients, as well as new customers entering the space, have a positive experience.

Just want to echo the same sentiment of great numbers this quarter. I just wanted to touch on a couple of topics here. That I know a lot of the previous callers and yourselves in the presentation touched on the Origin House closing. What I'd like to understand because we -- I personally have never gone through the process. I'd like to understand a little bit more in terms of the details around how inclusive that it is? How much contact you have on a regular basis I guess with the HSR review team? What your certainty is around closing, given that, as you mentioned, took you 11 months to close the previous transaction.

And also in the SG&A how much of the legal costs have already been reported in conjunction with this quarterly report?

Adam, thanks for calling in. This is Charlie. So with regard to the process as I'm sure everybody expects just because of the importance of it and also the time line associated with getting through it, it's an invasive process. But that also comes with again the almost continuous communications between the organizations and the department.

And so again that's where we really do have this very interesting and unique platform to help really not only get through this process, but in doing so really inform and help the agency understand more about the cannabis space, not just the transaction that's in front of them. And as I've shared this story with investors over the past few months, this is not unlike when myself and my partner Joe and our other cofounders were in the mortgage banking space and the CFPB was created and came in and audited and regulated independent mortgage banks for the first time. It was a matter of first impression. It was a new subject matter for them to learn and they've -- they truly appreciate a welcoming sort of approach and a mutually beneficial sharing resource type approach from those operators that are involved in that evaluation process. And it's very similar to what we've experienced so far with DOJ. The, let's see, the other part of the question there...

And Adam, you had asked a second part of the question before that, the legal cost question with regard to the timing of approvals. The one thing I will add with the -- with New York was taking 11 months, while some of that is just -- it's a normal progression in a way that the regulators are analyzing these transactions, that also coincided with a political push to legalize adult use in that state. And so there is an added level of sensitivity related to approving transactions or modifications around the medical program, while the other focus was pending as it related to adult use in that state.

So some of that 11 months, absolutely, could be attributed to the sort of the political nuance of an adult-use push at the same time.

Okay. Great. And I just want to ask -- go back to the gentleman from GMP touched on rec coming in, which is only 4 months away. My understanding is that the population of Illinois as a state is about 13 million people, putting it around #5 or so in U.S. And the Chicago Tribune reported just this past July that 117 million visitors in 2018 entered into the state, with 50 million alone in the Chicago area.

So I imagine this has to be some of the largest statistics outside of California that is by any state in the U.S. Can you talk, specifically, because it's very concentrated, of course, to Chicago, can you talk specifically about Chicago and how you guys are prepared to service that concentration of not only population, but tourists?

Yes. Thanks, Adam. This is Charlie, and Joe will chime in here too with some additional color. But no doubt about it, the market side of Illinois, it's -- I think everybody -- at least the sentiment that we've seen so far from the investment community and the industry as a whole, they recognize the importance of Illinois moving forward with this adult use and the importance of a top 5 populated state located in the Midwest. And also including a limited-license structure.

So it's going to be novel. This type of demand with the limited-license structure really has never been seen before. So it's an incredible opportunity. Again, for us being the market leaders here, having the highest market share by a significant margin, to really benefit from this growth, is pretty dynamic. And that's even made sort of further -- sort of exaggerated even by the fact that we're the only cultivator in Illinois that has 3 cultivation licenses.

And so with this new law putting a cap on the square footage of flowering and canopy that you can have, we have -- we're the only operator in the state that is going to have 630,000 square feet of canopy at full maturation. There is a couple of others that have 2 licenses. They'll be capped at 420,000 square feet. And then everybody else will be capped at 210,000. So the opportunity for Cresco to really take advantage of our home state, both with the biggest footprint and the current biggest market share, it's a fundamental opportunity that we look forward to taking advantage of. As far as Chicago, I think Joe will add some color there.

Yes. I would just say one of the exciting things for this is the fact that the City of Chicago is on board for the adoption of adult use. I think as you've seen other markets come online, the big driving city hasn't been on the front lines of the adult-use adoption. With Illinois doing such a good job addressing social equity, social justice concerns, the City of Chicago and the new mayor has really taken it upon herself to make sure that this has a smooth rollout in the city.

So we're very excited where the majority of the population lives, you're going to have access to cannabis in a very material way. Like we did with the Governor's committee, where Charlie sat on the board there, we're also engaged with the City of Chicago and sit on the advisory committee to the rollout of adult use in the city.

So we're very excited to see that happen and come to life in near term. And we currently have a dispensary in one of the most populous areas of the city right outside of Wrigley Field. So we're well-positioned to have a lot of foot traffic, a lot of new patients, a lot of new consumers entering the space come to our existing stores.

Sure. Thanks for the question, Adam. This is Ken. As you think about the revenue that we achieved in Q2, which was up significantly quarter-over-quarter, 42%, and the pro forma revenue behind that, $52.7 million, that was up 55%, you have to keep in mind that the vast majority of that revenue and the consolidated numbers were generated just from 2 markets: that was Illinois and Pennsylvania.

We saw sequential growth in both of those markets, up 30% quarter-over-quarter with the exact same asset base. So this gives us a lot of confidence that the strategy is right. That you have to continue to go deeper in each one of these markets. So as you then expand from mainly 2 states, and we saw this -- certainly saw the results in California over this quarter, as you continue to expand and recognize revenue contribution from all 11 states, you could see the significant amount of revenue potential that is behind the 11-state addressable market that we have, which again, cash are 70% of the U.S. So we feel like we're better positioned as anyone to capitalize on the continued growth within the industry.

So not to belabor the issue on Well Beings, certainly very exciting. Just curious if you can offer any color around what we should expect in terms of the margin differential between DTC and retail? I would expect DTC is higher margin just so it makes sense that you would prioritize it. But any just kind of framework that you could offer would be helpful.

Sure. This is Charlie. So yes, as you expected, margins with DTC are materially higher than they would be through the retail channel. Not the only reason why we're trying DTC first, again, for us it was -- it really, that brand itself was built with the idea of the DTC approach. We liked what we saw happening in some of these more, I would say, current or new CPG categories, which really just -- where they get their initial start by going direct to consumer we really liked the opportunity that, that provided and also you're talking about some traditional cannabis THC guys that have dealt with the limitations on marketing and the ability to communicate directly with consumers.

So the -- part of the reason of going direct to DTC, initially, of course, great margins, but also it's this new category for us that we've been itching to be a part of and to explore further. So that's where these -- you've -- I think, a lot of the people on the phone, investment community have gotten to know our marketing team over the past few months. And this is sort of right up their alley, and again, the team of third-party agencies that we've put together to help develop our approaches, not only on the cannabis and THC side, but on the CBD side is the same. So that -- put those together and that's why we're focusing on DTC, initially, with that Well Beings brand.

That's helpful. And just a follow-up on Well Beings. It sounds like if there is going to -- if there's already some active discussion with retailers, I suspect they probably just didn't start yesterday. And so I'm just curious whether the tone or the nature of those discussions has evolved with the FDA warning one of your competitors about claims.

I think the conversations -- and this is Charlie again, I think conversations have stayed consistent. I think the retailers that have made the move to get into this space did so with eyes wide open. And I also think then that also goes to the reputation that you build for your organization well prior to the initiation of the conversations. And again, that's also one of the reasons they're having the conversations that they are with certain operators.

I can tell you that the tenor of the discussions that we've had so far has remained consistent. And again, it just -- even the FDA letters, things like that and not isolating that just to CBD and traditional retail. I think that applies across the sector as a whole. It really just shines a light on the operators that are regulatory-compliance focused, and the asset that, that brings to an organization when that's part of your fabric, when that's part of your core values, it does help to distinguish you. And potentially, even strengthen the bonds and the relationships that are being developed with newcomers to the marketplace.

Great. There's certainly encouraging to hear. And my second question is on Sunnyside, perhaps a little bit more philosophical, given that it's early days on a nationwide rollout, but how do you think about establishing kind of relative price points on an apples-to-apples basis versus your competitor? So just to offer a little bit more on that, are you thinking about you want Sunnyside to be a premium to the national category to competitors in a given state? And then are you doing price benchmarking? Again, is it national, like for -- on an ASP level? Or is it state-specific pre excise tax?

Vivien, this is Joe. From the Sunnyside standpoint, the experience with Sunnyside is all about being welcoming and looking to steward a multitude of different types of consumers into that store. So within the store itself, you'll certainly have the good, better, best categories in there with different margin and markup allocations into those categories.

As a company, we will try to keep the pricing structure similar across states. The unique nature is obviously the input material, the wholesale price, into those states varies from market to market. But what I'll say is we will maintain similar margins and markups across the entire platform within those good, better, best categories. You won't see differentiation on our markup, but you may see a different price to the end retailer because the input material costs more in, say, Pennsylvania than it does in a market that has unlimited licenses or something along those channels.

Yes. The expectation is to have all 5 of the additional stores open in Q1. I think the goal, internally, is to have 3 of those 5 open January 1. So I think you'll see a couple of the additional ones lead towards the middle to the end of Q1.

But our real estate team, our construction and development team is full throttle on that aspect. And we expect to have them open as quick as possible.

Yes. Matthew, this Ken. In terms of the quarter, we saw a slight shift from Q1, the amount of the wholesale revenue was 62% and 38% retail, which was up from a split of 55%, 45% in the prior quarter, and that was primarily driven by the increase in wholesale revenue within the state of California.

Perfect. Also on the pro forma revenue based on, obviously, Origin House pre-reporting their number. We surmised that most of that additional revenue comes from just trying to bridge the gap from your reported revenue to pro forma. Is it possible to provide a breakdown of how much was from -- of the remaining was from Florida versus New York?

Matthew, it's Ken again. So pro forma revenue, $52.8 million. Again, up 55% quarter-over-quarter. Consolidated revenue of $29.9 million up 42% so that was -- the difference between the 2 is $22.8 million. So of that amount, $15.6 million was Origin House, and we did see their revenue increased 90% quarter-over-quarter. So that leaves -- quick math, $7.1 million of revenue contribution coming from Florida, Massachusetts, New York, and our investment in Nevada.

And again, we expect accelerated growth across all of those markets in the future quarters and certainly meaningful contribution in the second half of the year, but we don't split out the individual state revenue performance.

Fair. And then last, quickly, on the -- there was a tax charge you said related to the closing of the MedMar acquisition. And I noticed last quarter you didn't have any income tax expense. So can we expect that to be onetime and not extrapolate that moving forward?

Yes. Most of the -- as you saw our income tax expense was a bit elevated this quarter. That was largely the result of the legal close of MedMar and PDI. And that was more of a onetime deferred tax asset.

So it's -- you will not see that continue in future quarters. Certainly not to that extent.

Yes. So the Philadelphia store will open in November. That will be the first launch of the Sunnyside brand, we're really excited about that. The other 2 stores should open end of Q4, early Q1. we're still in construction phase, and winter times slows it down a little bit in that part of the country.

Understood there. Just moving on to Florida very quickly. I think you said you're still targeting 20 locations to be opened for the end of December. Can you give us an idea I guess how many locations you've actually secured or locked down?

And as a follow-up to that, the 105,000 square feet of cultivation footprint, how much -- in aggregate, once that's done, how many dispensaries do you think you can support?

So there is actually 20 -- there's 12 stores open, 2 more are opening very shortly. And then all 20 locations have been sourced. So it's just a matter of working through the construction process there. The -- when we close on this transaction, there will be 170,000 square feet of cultivation space that is built out or in the final phases of being completed.

So that -- we feel that's more than sufficient to support those stores. We will continue to look for opportunities for additional cultivation space. But I think with the 20 stores, we'll have more than enough supply to surprise -- to provide.

Just one quick question from me. Just when you look at the balance sheet exiting the quarter with $61 million, you still have to fund the cash component for VidaCann and some of your other pending acquisitions, and then you adding kind of the expansions that you have underway in Illinois and some of the other buildouts. Just kind of wondering how you view your current funding situation?

Jesse, this is Ken. Thanks for the question. I guess the way that I would approach this is, look, as the premier name in the space with lots of debt capacity, especially as we continue to scale the company, we have several opportunities that we're currently evaluating. We're in the late-stage discussions focused on non-dilutive capital. This will further optimize our cap structure, reduce our cost of capital, enhance our flexibility to fund these ongoing growth initiatives. While I can't share any more of the specifics just yet, suffice to say that we're absolutely on top of the situation.

I just wanted to follow up quickly with respect to the comments made on Arizona. You recently rolled out delivery as well as wholesale. Just wondering how you balance in current execution of that market with the potential for seasoned legislative change in the medium term, given that there was some early language that just came out there?

Yes. This is Charlie, Graeme. So the Arizona market we like a lot. And I think it's fair to say we're not content with the position that we currently have in Arizona. As Ken had mentioned, when it comes to where our future outlook or near-term outlook for M&A, it's not about including new markets into our footprint. It's going to be going deeper and creating this more meaningful positions in the markets that we're in and already love.

So we're not happy, we're content, I would say, with our position in Arizona. That's something that we'll be looking to expand upon in the near future.

As far as the marketplace, market dynamics, we like it. Whether or not delivery is part of the actual law that gets passed as TBD, but we like brick-and-mortar retail. We get it. We also like ease of access for consumers. So that's something that we'll continue to work on and develop as we increase our position within the fabric of that Arizona market.

You've covered a lot of ground here on this call. Just a couple of quick questions. You talked about the expansion of your margins in Illinois and Pennsylvania. Any comment in terms of pricing in those 2 markets, whether it be retail or wholesale?

Yes. So largely that margin increase that we saw, particularly in our key states of Illinois and Pennsylvania, that was -- those were significant. That was 4.9 and 9.1 respectively. That was in -- that was mainly driven through operational efficiencies, really focused on our efforts to drive automation and improve our cost per gram, and we've done that significantly in both those states. Our cost per gram quarter-over-quarter declined by about 25%. So -- and that was really an environment where pricing stayed flat in both of those markets. We haven't seen any price compression in Illinois or Pennsylvania to date.

Okay. No, that's great. And then, finally, we've seen other states that went recreational adult use, they've had some hiccups in the early days, around labeling, around testing. What is your confidence that Illinois will launch January with -- without too many roadblocks?

It's Joe. We have a very strong working relationship with the regulatory bodies in the state of Illinois. We were involved in the crafting of that legislation. So I think we have a very high level of confidence that this market launches recreationally without a hitch at all. There is certainly the bumps in the road as it relates to the transition and stores opening and all those things. But I think from the manufacturing/distribution side, we will be well prepared to launch on time into this marketplace.

Yes. Briefly, I just want to thank everybody for joining the call today. We are -- we're excited about the quarter that we were able to deliver on, and we look forward to updating you on the next call. So thank you very much.